FedEx (FDX) Q2 Earnings Lag Estimates, FY19 EPS View Bearish

FedEx Corporation (NYSE:FDX) reported mixed results in the second quarter of fiscal 2019 (ended Nov 30, 2018). The company’s earnings (excluding 53 cents from non-recurring items) of $4.03 per share missed the Zacks Consensus Estimate of $4.05. However, the bottom line improved 26.7% on a year-over-year basis. Results were aided by growth across all its transportation segments.

Quarterly revenues increased 9.3% year over year to $17,824 million, beating the Zacks Consensus Estimate of $17,712.7 million. Growth was witnessed across all major divisions of the company.

Operating income (on an adjusted basis) climbed 7.3% year over year to $1.33 billion in the reported quarter. Meanwhile, operating margin declined to 7.5% from 7.6% in second-quarter fiscal 2018.

Segmental Performance

Quarterly revenues at FedEx Express (including TNT Express) rose 6% to $9.6 billion on the back of growth in U.S. domestic package volume among other factors. Operating income came in at $620 million, up 3% year over year. Meanwhile, operating margin slipped to 6.5% from 6.6% in the year-ago quarter.

FedEx Ground revenues increased 14% year over year to $5.14 billion in the period under consideration. Volume growth and higher yields aided the segmental performance. Operating income came in at $586 million, up 18% year over year and operating margin inched up to 11.4% from 11% in the prior-year quarter.

FedEx Freight revenues jumped 15% year over year to $1.92 billion. Segmental revenues benefited from higher revenue per shipment and average daily shipments. Also, the segment’s operating income surged 37% to $148 million. Moreover, operating margin expanded 120 basis points to 7.7% in the quarter.

Bearish Outlook

The company has trimmed its earnings per share guidance for fiscal 2019. It now anticipates the same in the range of $15.50-$16.60 excluding pension adjustments and TNT Express integration expenses. Prior view was in the band of $17.20-$17.80. The Zacks Consensus Estimate for fiscal 2019 earnings stands at $17.32.

Capital expenses are still anticipated at $5.6 billion while effective tax rate is expected between 24% and 25%. The company has taken a few cost-reduction initiatives. As part of this endeavor, during the fourth quarter of fiscal 2019, the company anticipates a pre-tax charge of $450-$575 million on account of a buyout program for U.S.-based employees. However, this program is estimated to generate approximately $225-$275 million in savings during fiscal 2020.

Moreover, the company will not be able to achieve its objective of raising its Express segment operating income by $1.2-$1.5 billion in fiscal 2020. Additionally, realization of benefits from TNT Express acquisition will be delayed. This downside is attributable to lower-than-expected express package volume due to weakness in the European economy and a change in service mix induced by the TNT Express cyberattack in June 2017.

The company further stated that the major revenue generating segment’s performance is declining, thanks to a global slow down in trade over the past few months. What’s worse is that there are evidences of the turbulence to persist in the near-term.

This downbeat outlook displeased investors. Consequently, shares of the company dropped 6% in after-hours trading on Dec 18.

Zacks Rank & Key Picks

FedEx carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader Transportation sector are Spirit Airlines (NYSE:SAVE) , Air France-KLM (OTC:AFLYY) and International Consolidated Airlines Group (LON:ICAG) SA (OTC:ICAGY) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Spirit and Air France-KLM have rallied more than 50% and 20%, respectively, over the past six months. Meanwhile, the International Consolidated Airlines stock boasts an impressive earnings history, outpacing the Zacks Consensus Estimate in three of the last four reported quarters, the average beat being 92.9%.

Wall Street’s Next Amazon (NASDAQ:AMZN)

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>